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Finance
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Renting vs. OwningAs a renter you are missing out on a substantial investment opportunity compared to owning your own home. Home ownership is not only a great retirement investment savings vehicle but also a hedge against inflation and one of the best tax shelters available to Canadians. If you occupy your home as your principal residence, when you sell it, all the gain is tax free for income tax purposes.Bottom line: If you can afford to own your own home and you have satisfactory credit, then don’t rent! A great and free source of information for home buyers is the “Homebuying Step By Step – A Consumer Guide and Workbook” by CMHC www.cmhc.ca Home Buyer’s PlanIf you qualify as a first time home buyer you can use your RRSPs towards the purchase of your own home. You can withdraw up to $20,000 per individual as a loan from your RRSP to buy or build your home. This withdrawal will not be subject to income tax. However, you must repay the RRSP loan (without interest) over a 15 year period starting in the second year following the year of withdrawal. If you miss a RRSP loan payment the amount due will be added to you income for the year and taxed accordingly, so it’s important to pay back the loan as stipulated.You will need to fill out Form T1036 when using your RRSPs to buy your home. This will ensure that the financial institution you deal with will not withhold taxes when you withdraw the funds. Note: RRSP funds need to be accessible and redeemable to use under the Home Buyer’s Plan. You will need to discuss your individual circumstances with your financial institution. For example, term deposits in your RRSP may not be accessible without your Financial Institution releasing such funds. Same applies to Group RRSP or locked-in-RRSP (LIRA), you may not be able to access these funds. You will have until September 30 of the following year to complete the purchase of your home. Extensions are possible. (See your Financial Institution or your Financial Advisor for more details.) Property Transfer TaxIn most cases this tax will probably be the most costly expense of buying your home.The tax is calculated this way: 1% on the first $200,000 and 2% on the balance. Example:
Make sure you make provision for this tax or your purchase will not go through as your lawyer will not be able to register you on title. First time home buyers are exempt from this tax as long as the purchase price is $375,000 and below. If purchase price is $25,000 over exemption price of $375,000 then first time home buyers may also qualify for a proportional exemption. Various qualification criteria are outlined for First Time Home Buyers Guide provided by the provincial government. For instance:
High Ratio MortgagesIf you're buying a home and you are borrowing more than 80% of the home's value, the mortgage must be insured. This insurance protects the lender against borrower default, and enables them to give you mortgage financing for the purchase of a home with as little as no money down. Mortgage default insurance can make a big difference in how quickly your mortgage loan is approved. Canada Mortgage and Housing Corporation (CMHC) and Genworth are the two principal providers of mortgage insurance in Canada. This mortgage insurance can be added onto your mortgage or paid up front.First Time Home Buyers Benefit from Lower Costs with CMHC Effective April 22, 2007 CMHC is lowering mortgage loan insurance premiums for the second time in two years. First time buyers with 5% down will benefit from a further 15% reduction for a total of 30% over the past two years. Genworth’s premiums can range from 0.50% to 4.80% depending on the amount of your down payment. (See your mortgage provider) Tips for Real Estate InvestorsSimple rule: If the rent you receive every month exceeds the monthly expenses of maintaining the investment property (i.e. you have positive cash flow), then you likely have a viable investment property.Expenses such as insurance, management fees, property taxes, utilities, maintenance and the mortgage payments must be taken into consideration. If the expenses are greater than the rent you receive (negative cash flow), before you bypass the investment opportunity, determine the rental market trend in that specific market place by looking at vacancy rates and annual rental increases. You may decide that it’s worth carrying the property for a short time until rents increase to cover all your costs. Don R. Campbell’s “Real Estate Investing in Canada” is an excellent source for those wishing to learn more about property investing. Don talks about “The 10 Percent Rule” which basically states that; “If the annual gross rent is 10 percent or more of the purchase price, the then property is worth further investigation and a more detailed analysis.” For example:
Given these numbers the property warrants closer investigation. If you hold the investment property/ies in your personal name – not a corporation – then you could treat the rental income as your personal income. There are tax advantages to doing so and you will need the contact your account for further elaboration. Once you sell the property then it will be subject to tax (capital gain). The purchase price will be subtracted from the sale price and any gain will be treated as a capital gain. Simplified example:
50% of the capital gain is tax free ($15,000) and the other 50% will be added to your income and taxed according to your marginal tax bracket. Consider registering the property in joint name with your spouse when you buy investment property in an attempt to minimize the tax burden upon sale. Again, see your accountant when the time comes to buy or sell your investment property. Tax planning ahead of time can save you a lot of grief. Financing Investment Property:Financial Institutions (F.I.s) are happy to lend you money to buy investment property/ies as long as your Total Debt Service Ratio (TDS) is 40 % or less than, or in some cases a little over 40% and you meet their other qualifying criteria, so be patient. If you are self employed F.I.s will often consider a TDS well over 40% after allowing the F.I. to review your T1 General for 3 years, Notices Assessment for 3 years and your credit checks out to their satisfaction. Having good credit in general is important to the qualification process whether self employed or salaried. The major banks in particular tend to be somewhat cautious and particular about meeting their guidelines – which is great for the financial stability of the lending system in Canada.The advantage of dealing with the major banks is that you can finance investment property anywhere in Canada. You cannot do this with credit unions at this point. However, you cannot get a mortgage on a property you wish to buy outside of Canada – even in the United States. Other financing options will have to be considered. Investment properties do not qualify for CMHC or Genworth insurance so you will need 20% to 25% down payment depending on the individual F.I. rules. Generally, F.I.s apply 50% of the rental income as eligible towards your mortgage payments. This in part, is to compensate for any months the property is vacant. If your investment property is Strata (e.g. Townhouse or Condo) consider joining a Rental Pool, which in most cases continue to provide you with a slightly reduced monthly rent when the property/ies are vacant. The moderate cost of joining a rental pool should provide peace of mind. Remember to factor the rental pool payments into your monthly operating expenses. Inquire from the property management company you deal with regarding Rental Pools. Bear in mind that the Property Transfer Tax (except Alberta) still applies to investment property, so factor that into your cost. Bank of Canada http://www.bank-banque-canada.ca/en/index.html Best link to keep up to date with what the Bank of Canada is doing with the prime rate and other great information. |